Pre-Close Market Comment
UK manufacturing output reached its highest level in a decade in November, as the sector benefited from a weaker pound and strong global growth. Manufacturing in the U.K. is enjoying the longest period of increasing output in over 2 decades, as it jumped 1.4% in the here months to November.
This, in addition to a strong performance from the UK service sector has led, the National Institute for Economic and Social Research (NIESR) to report that it was anticipating an increase in economic growth of in the fourth quarter of 0.6%, the strongest level of growth since 2016 and marginally ahead of City expectations of 0.5%.
The stronger economic growth prospects in addition to inflation set to remain above the Bank of England’s 2% target, means that there is increased probability that the central bank could hike interest rates to 0.75% in May. Following the release, the pound soared 0.5% versus the dollar to a high of $1.3561. However, sterling has been unable to hold onto the gains and gave up some of the gains, moving into the close 0.1% lower.
The weaker pound help support another move higher for the FTSE, which is heading for a record close, despite US bourses moving lower.
China may stop buying US debt
Over in the US, equity stock markets slipped lower on Wednesday in the first real test for the markets since the start of the new year. Reports that China may stop buying US debt have been sufficient to halt the recent rally. The report suggested that Chinese officials consider US debt to now be less a less attractive investment than other assets; furthermore, increasing political tensions between the US and China could provide a good reason to halt or at least reduce purchases.
China is the biggest buyer of US sovereign debt. If China goes ahead with the tapering in purchases, liquidity in the US bond market could suffer. Furthermore, the timing of this is pretty awful given the US Treasury’s financing requirements in 2018 and the fact the Fed are trying to unwind its massive balance sheet. In short, this move by China would put the bond market, which is already under pressure, under further pressure.
Market reaction
The markets are showing signs of concern, treasuries and the US dollar have fallen, whilst gold has moved higher. The US 10 year yield rose 2.58% a level not seen since March last year. The US dollar dropped 0.5% on the news to a low of 91.93. It has since regained some ground to 92.20. The Dow Jones was also under pressure dropping over 100 points before recouping some of the losses.
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